Investment Highlights

• We maintain HOLD call on Guan Chong with a lower fair value of RM2.29/share (from RM2.47/share previously), pegged to an unchanged FY24F P/E of 16x – at 1 std dev below its 5-year mean of 18x. This also reflects an unchanged neutral ESG rating of 3-star.

• Our lower fair value stems from a reduction in FY23F-FY24F net profits by 5%-7% to account for higher interest rate assumptions while maintaining FY25F earnings.

• Guan Chong’s 9MFY23 earnings of RM86mil missed expectations, accounting for only 65% of our earlier FY23F net profit and 55% of consensus. The negative variance was mainly due to higher finance cost. As a comparison, 9MFY22 accounted for 87% of FY22 core net profit.

• The group declared its interim dividend of 2.0 sen per share, as expected.

• YoY, 9MFY23 revenue rose 8% on the back of the higher selling price of cocoa products. However, earnings dropped 33% YoY, impacted by lower grinding margin coupled with heightened finance cost on elevated interest rates.

• QoQ, 3QFY23 earnings of RM34mil rose by 20% on the back of 11% revenue growth, thanks to higher selling price for cocoa butter, cocoa solids and industrial chocolate despite increased finance cost.

• The group’s EBITDA also improved by 11% QoQ, partly driven by operations in Germany (+27% QoQ) and Singapore (+32% QoQ) mainly due to better average selling price of industrial chocolate and lower energy prices.

• Moving forward, we continue to be cautious on the group’s near-term outlook on the back of:
  (i) rising cocoa prices due to poor bean production yield, and
  (ii) shipment deferments due to customer concerns on high cocoa prices.

• Meanwhile, cocoa prices increased 63% YTD to USD4,244/MT, which we believe will continue to rise given a low bean yield in West Africa impacted by weather, black pod diseases and swollen shoot virus.

• The group currently trades at a fair FY24F PE of 14x, vs its 5-year average of 15x due to higher raw material costs, while offering low dividend yields of 1%.

Source: AmInvest Research - 28 Nov 2023